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Diverging Mall Performance: Opportunity in B+ Properties?

The “Great Recession” appears to have accelerated a number of trends that are dramatically re-shaping the retail landscape.  This re-shaping of the landscape is leading investors to question not only the investment opportunity presented by B grade regional malls but the very viability of this format.  The sector does present niche opportunities for opportunistic investors.

The decline in consumer spending quickly accelerated the number of store bankruptcies and closings, a trend that had been on the rise for some period before the recession began.  Meanwhile, internet-based sales remained on a remarkable upward trend during the recession, continuing to take buying power away from traditional retail distribution channels.  Changes income demographics have been segmenting retailer performance, with value-oriented and higher-end retailers performing well at opposite ends of the income spectrum.  The compounded affect of the changes appears to have accelerated a divergence in regional malls performance, with clear winners and losers.

“Class A” regional malls in the best locations with strong demographics have continued to generate high sales in recent years.  Weaker regional malls in secondary locations appear to have languished as their anchors face stiff competition from discounters and Power Center formats.  Some observers remain particularly downbeat about the prospects of the weakest-tier regional malls:  one retail analyst suggested that more than 40% of the nearly 1,400 regional and super regional malls are unlikely to survive in their current configuration, and will face either wholesale reconfiguration or demolition.1

Highly opportunistic investors may find opportunities in this segment of the market, converting regional malls to alternative uses, such as data centers,  mixed-use housing and office developments, or an alternative retail formats such as power or lifestyle centers.  However, for more selective yield-oriented investors, the diverging performance trend appears to narrow greatly the field of possible investments. 

Indeed, the diverging mall performance trends are evident among a sample of 95 properties managed by public REITS that report property-level in-line shop sales data.  The exhibit below plots the median and various percentiles for 2007 sales per foot against the subsequent average growth in sales per square foot for each group between 2007 and 2010.  Properties at or below the median sales per square foot – at $325 in 2007 – registered an average decline in sales psf of 8.1% as the economy transitioned from boom to recession.  For those with sales psf that ranked in the lower decile, the decline was more severe, at an average of 12.8%. 

At the other end of the spectrum, those malls that ranked in the top 10% in terms of 2007 sales – roughly $450 psf or greater – registered an average increase of in sales psf of 5.8% over the subsequent three years.  As the retail market moved into recovery during 2011, the divergence in performance between the malls with the highest and lowest sales per square foot appeared to persist.  For instance, the 2010 to 2011 sales growth rate for malls that ranked top 10% in terms of 2007 sales psf levels was more than three times the rate of malls that ranked in the lower 25% of 2007 sales psf levels.   

While there are limitations in interpreting the data, the sample provides some evidence of the divergence in mall sales performance over this period.   Earlier studies also indicate that the divergence trend has been occurring since the early 2000s.2  Given this set of circumstances, what are some likely implications for investors going forward?  What kind of investment strategies may be formed to take advantage of the re-shaping mall landscape?  

Diverging ​Performance: The Strong Get Stronger

As the mall performance gap emerged over the past several years, retailers and landlords have been keenly focused on improving the productivity of existing stores.  Several large retail operators have recently looked to shed their least productive sites, and focus on redeveloping or enhancing their most promising facilities.  As a result, new mall development activity remains quite limited.  Major department store and category retailers have refocused their real estate strategies and are downsizing space needs in light of the growing competition and the popularity of internet-based retailing channels.

Two key strategic investment implications come to mind when one evaluates the regional mall performance gap.  Clearly, one could take a conservative core-based strategy that would focus on the best performers – through the very disruptive times of the past few years, the best located regional malls continued to outperform.  Many of these malls have been situated to take advantage of continued strong consumer spending at the upper end of the income spectrum, and are located in markets that have an established and highly-educated, affluent consumer base.  This segment of regional malls appears to be a relatively secure bet, as they continue to serve as an efficient distribution channel for a wide variety of specialty goods, services, restaurants and entertainment options.  

More interesting from both a strategic and potential pricing standpoint, however, are those “B-B+” quality malls that serve a solid middle or upper middle-income demographic that may provide either a “core-plus” or “value-added” investment play through re-tenanting or reconfiguration.  For this set of regional malls, the successful investment strategy is related to determining the degree that the mall can be viable and productive in its current format, and what specific re-tenanting and demographic risks may detract from future performance.  Some of these malls may have traditional department store anchors and in-line tenants that have been squeezed by value-oriented discounters and competing power center formats.  Yet, at the same time, they may offer strong locations and trade areas with prospects for future growth.  One of the key questions for investors is to determine how readily anchor space may be re-tenanted in the event of anchor bankruptcy or closing, in order to continue to attract shoppers to the mall. 

Well-located malls may have the advantage of attracting category or big-box tenants who are interested in downsizing their space needs related to a “clicks and bricks” strategy, while satisfying their need for high-traffic locations.  Over the past few years several large “big-box” category retailers have begun to pursue a mall expansion strategy that targeted smaller-sized boxes.3  While the trend is relatively new and there are certainly challenges to accommodating the space needs of such tenants, certain malls may be more easily configured than existing power centers to suit such tenants’ evolving space needs.  Investors may take advantage of the emerging trend that may become increasingly commonplace:  the evolution of “hybrid” centers that offer a combination of traditional shop tenants as well discounters and category specific retailers that are currently prevalent in power centers. 

By focusing exclusively on the highest quality regional mall opportunities, investors may forego significant additional yield as well as opportunities for increasing value through re-tenanting or space reconfiguration.  Furthermore, one could make the case longer-term supply and demand trends may favor such investments.  With minimal new mall construction expected over the next several years, and the reduction of supply through either conversions or demolitions, the stock of competitive mall space is likely to shrink.  It is also unclear as to how long and to what extent the mall performance gap may persist in the face reduced mall supply, and likely limitations to the increasingly skewed income distributions that have driven retailer segmentation in the recent past.  A lack of investor focus on properties that serve a middle income-demographic,  instead of the luxury or value-oriented retail real estate segments that are currently in favor, may provide opportunities. 

Of course, identifying specific malls that are good investment prospects takes a high level of due diligence, from local site visits to comprehensive market and competitive analysis.  CBRE Research recognizes that in addition to a review of the physical asset and its tenancy, the local trade area/market analysis is important to identifying the asset’s potential to attract sales and therefore future rent growth.   Several questions should be addressed as part of the market analysis component of the due diligence program.  For example:

  • What are the specific age and income demographics in the subject mall’s trade area?  How have they evolved over time?  What are the prospects for future growth in income and population? Is the trade area in a growth phase or headed toward decline?
  • What are the important economic drivers for the local and metro area?   What are the prospects for economic growth in the future?  What types of activities will support income and spending?
  • What does the mall’s competitive landscape look like?   How is the mall performing relative to peers and how is it generally perceived in the marketplace?  Is there growing competition from power centers and discounters in the area? 

​When CBRE Research has analyzed specific assets for clients, these three questions deliver a variety of results.  Not all B grade regional malls are the same.  Economic and demographic profiles around each assets when combined with “on-the-ground” leasing expertise of the CBRE Brokerage professionals has helped us to paint a picture of some assets that continue to exhibit stability even as others are buffeted by the winds of a changing retail landscape.

1 Misonzhnik, Elaine, “Return of the Mall”, Retail Traffic, June 1, 2011.

2 See Friedman Billings Ramsey, Property Week, March 20, 2006.

3 See Misonzhnik, Elaine, “Regional Mall Owners Seize Power, Lifestyle Center Tenants”, Retail Traffic, April 20, 2011.


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